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Subdued inflation gives the Reserve Bank room to move on rates

A BENIGN inflation rate for the December quarter has paved the way for further cuts to the cash rate this year, but does not prove the "smoking gun" needed for the Reserve Bank to act next month.

The consumer price index, a measure of prices paid by consumers for commonly bought items, rose 0.2 per cent for the quarter and 2.2 per cent for the year, at the lower end of the Reserve Bank's annual target band, and slightly below economists' expectations.

Underlying inflation was 0.6 per cent for the quarter, data from the Bureau of Statistics showed.

"Inflation is well and truly contained and the Reserve Bank certainly has the scope to cut interest rates in February if it believes it is necessary," Commonwealth Securities economist Savanth Sebastian said.

Significantly, the Bureau of Statistics figures show wages growth outpacing inflation, with private sector wages in the year to the third quarter of 2012 rising 3.7 per cent - an increase tipped to fuel concerns over the nation's rate of productivity.

ANZ senior economist Riki Polygenis said despite the subdued rate of inflation, she did not expect the Reserve Bank to cut rates at its next meeting as "inflation has taken somewhat of a back seat to other concerns about economic activity at the moment".

"We think the more critical releases for the RBA will be the [capital expenditure] expectations for 2014 and the next labour force report, both due after the RBA meeting in February."

UBS economists Scott Haslem and George Tharenou said several other factors, including the RBA's easing cycle, which has seen it cut rates by 175 basis points since October 2011, positive economic news from the US, Europe and China and improving commodity prices meant the central bank was less likely to act in the short-term.

"[There's] no smoking gun for more near-term rate cuts," they said.

Financial markets' expectations of an interest rate cut in February stood at 39 per cent, Credit Suisse data showed. The market has priced in another 50 basis points of rate cuts for 2013, taking the cash rate to 2.5 per cent.

The Australian National Retailers' Association called for a February easing, saying that retailers remained in "heavy discount mode" to attract customers.

"Retailers have reported a reasonably flat Christmas and the first quarter of any year is traditionally very slow. Retailers will be looking for all the help they can get to convince Australians that it's safe to emerge from their savings bunker and spend again," association chief executive Margy Osmond said.

The Australian dollar slipped a quarter of a cent following the data release, and traded around $US1.0540 about 5pm on Wednesday.

The Australian share market looked through the softer data, with the S&P/ASX 200 Index closing at 4787.8 points - another 20-month high for the week.

Economists said the high Australian dollar was also starting to keep inflation well contained.

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